the financial planning process chapter 3 tools & techniques of financial planning copyright...

The Financial Planning Process Chapter 3Tools & Techniques of

Financial Planning

Copyright 2009, The National Underwriter Company 1

The Financial Planning ProcessThe Foundation of Professional Financial Planning

The financial planning process is a systematic way to manage the financial resources of the client to help the client achieve needs, goals and desires in a manner consistent with client values.


Financial Planning


The Financial Planning Process

The financial planning process consists of disciplined steps:

Tools and Techniques lists six steps;

The CFP Board of Standards also lists six;

Other authors list five, six or more.

However, all the versions reflect the same strategic management concepts.


Financial Planning


Two Views of the Financial Planning ProcessTools & Techniques of Financial Planning

CFP Board of Standards

Establish and define the relationship Establishing and defining the client-planner relationship.

Gathering Background Information. Gathering client data, including goals.

Establishing financial objectives.

Developing financial plans. Analyzing and evaluating the client’s financial status.

Developing and presenting financial planning recommendations and/or alternatives.

Controlling and executing plans. Implementing the financial planning recommendations.

Measuring Performance Monitoring the financial planning recommendations.


Financial Planning


Establish & Define the Client-Planner Relationship

• The CFP Board of Standards recommends that the client-planner relationship be defined in writing.

• Careful disclosure of all relevant information and a client signature of agreement and understanding protects both the client and the planner.

www.cfp.net/learn/knowledgebase.asp?id=2 www.cfp.net/learn/ethicsforms.asp


Financial Planning


Financial Management ModelDEVELOP

FINANCIAL PLANS:Budget Income & Expenditures

Forecast Financial PositionsDetermine Financial Media

CONTROL & EXECUTE PLANS:Select Specific Financial Instruments

Appraise ActivityConstruct Financial Portfolio

MEASURE PERFORMANCE

ACCEPTABLE UNACCEPTABLEHold Steady Until Reconsider ObjectivesNext Measurement & Revise Plans

ATTAIN OBJECTIVES

END

START

ESTABLISH RELATIONSHIPAgree to Meet

Clarify Planner and Client Responsibilities

Provide ADV

BACKGROUNDANALYSIS:

Financial PositionIncome and Expenditures

DemographicsRisk Attitudes

ESTABLISHOBJECTIVES

Financial TermsPriorities

Time Horizons


Financial Planning


Establish the Relationship

• Client and planner agree to meet

• Outline the responsibilities of both the planner and the client

• Conflicts of interest, compensation arrangements, length of agreement period, and products and services to be provided disclosed and agreed upon


Financial Planning


Gathering Background Information

• This step is sometimes combined with setting goals.

• The better the job you do in this stage, the better plan you will produce.

• Identifying the client’s riskpreference is particularly important.


Financial Planning


Gathering Background Information Details

• Comprehensive Financial Information– Record of Income & Expenditures– Statement of Financial Position

• Personal Parameters– Age, sex, health– Lifestyle & Tastes

• Attitudes toward risk– Feelings about Financial Security– Independence– Investment risk

Some clients don’t keep very good records, leaving the financial planner to straighten it out.


Financial Planning


Establishing Financial Objectives

• Goals must be clearly stated.

• Goals MUST be quantified.

• Goals must be rated according to priority.

• Not every goal will be reachable.


Financial Planning


Establishing Financial ObjectivesAreas to Address

• Standard of Living• Savings• Protection• Accumulation (Investment)

• Financial Independence (Retirement)

• Estate Planning

No matter how good an analyst you may be, you will not succeed as a financial planner if you cannot communicate well with the client. Put yourself in the client’s shoes and really LISTEN to what he or she has to say.


Financial Planning


Developing Financial Plans

There are three sub-steps to developing financial plans:– Analysis– Development– Presentation

The CFP Board breaks this step down into two steps:– Analyzing and evaluating the client’s financial status. – Developing and presenting financial planning recommendations and/or

alternatives.


Financial Planning


Developing Financial Plans - Analysis

• Budgeting for near term

• Projection of client’s financial position after next several years

• Identification of strengths and weaknesses

• Identification of external threats and opportunities


Financial Planning


Developing Financial Plans - Development

• Develop strategies based on SWOT analysis • Identify financial instruments for these strategies and

savings media for emergency fund– Appropriate types of investments– Appropriate insurance

Note: Financial planning is much more than investment advice. You may find yourself investigating strategies concerning career decisions and health care and provisions for dependents. The client has hired you to be the CFO of their personal enterprise.


Financial Planning


Developing Financial Plans - Presentation

• This is the “What you need to do” part of the report. The quality of your presentation can determine whether or not the client will execute the plan

• Present the plan from the client’s point of view– What will it accomplish for the

client?– What are the consequences of not

executing the strategy?– What will be the client’s

responsibility and what will you do for them?

• Big books do not make good financial plans – clear reports do. At this stage, you need to get the client’s consent to execute the plan.


Financial Planning


Controlling & Executing Plans

• Set the plan in action.• Purchase or sale of assets• Purchase or replacement of

insurance• Changes in lifestyle

Closely monitor the execution to be effective inaccomplishing the client’s objectives.


Financial Planning


Measuring Performance – Monitoring the Plan

• Is the client making progress toward their goals?

• If results are acceptable, continue

• If performance is not on track, reevaluate the plan. It may be necessary to revise some goals as being unrealistic in the external environment.

• You may have to create an entire new plan.

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